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LIBRARY 


3326 
D566u 


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THE UNIVERSITY 
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| THE UBRARY OF THE 
MAR 3” 1996 
aa UNIVERSITY OF ILLINGIS 





















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The Wheat Pit 


By 
Edward Jerome Dies 


THE LIBRARY OF THE 
MAR 3 1926 
NIVERSITY OF HLLINGIS 


Published by The Argyle Press 
Chicago 1925 





COPYRIGHT 1925 
By THE ARGYLE PRESS 





First Printing, November, 1925 
Second Printing, November, 1925 


Third Printing, January, 1926 


' Contents 


From the Balcony - : Z 
Birth of the Pit - s IM 4 
Futures - - i : 3 2 
Speculation at ‘ : 


Hedging - z Seis ae 


That Wicked Short-Selling : 


On Cornering Grain - 2 : 


“Let's Investigate” - - -~ - 





F’rom the Balcony 


T is nine-twenty in the morning. The vast 

trading floor is stirring to life. Brokers are 
gathering in the pits or rings. Boys race about 
with blue, green and yellow order slips. Specta- 
tors mount the low slung balcony over the wheat 
pit. It is from this vantage point that the public 
views the great world drama of wheat. 


Quickly the pit fills. At nine twenty-eight 
the recording clerks climb to the telegraph 
“bridge’’ hard by the wheat ring. “They resem- 
ble camera men preparing to film some spectac- 
ular event. 


Suddenly lights flare up, fringing the pit. 
Electric fans begin their low whir. For a mo- 
ment a strange stillness falls. Then, on the stroke 
of nine-thirty, a gong sounds. It echoes through 
the old clock tower. And the roar of the pit 
begins. 


THLE Win £ AL eee 


It is a deep-throated roar. It swells into vio- 
lence like a wintry gale; it sinks into a low, 
steady hum.. On occasion when panic hits the 
pit the roar all but shakes the rafters of the 
quaint old structure and rumbles out into the 
- street like the roll of far-away thunder. 


Then it is that the spectator rejoices. He 
thrills to the stampede. Screaming headlines 
may have told him the world had gone wheat 
crazy. And the pit is the outward expression of 
that madness. ‘There it is before him, teeming, 
seething, boiling. A mass of milling humanity 
struggling for attention. 


In stark fascination the spectator stares into 
the strained faces below. “Thoughts flood his 
mind, thoughts of romance, adventure, the 
matching of wits for millions. Vaguely he re- 
calls tales woven with glamour about the 
crimson careers of long dead plungers, buccan- 
eers who sailed the high seas of the wheat pit. 
He fancies their ghosts now stalk the worn floors 
of the trading ring. 


Onward the market races to its daily denoue- 
ment, rising in high fever, falling in violent 


6 


ae Wan EAST OP IT 





chills and war-dancing crazily as powerful world 
forces clash in the battle of wheat. 


Finally, with the clang of the gong, it stops 
as abruptly as it started. 


The spectator stirs from his reverie and slowly 
descends to the street, the roar of the pit and the 
song of a thousand wires still pounding in his 
ears. Reluctantly he departs, for it has been an 
exciting day, a day in a world set apart—a day 
in the world of wheat. 


It is true that his study of the grain market 
has been a bit brief and superficial. Neverthe- 
less the spectator likely has acquired some defi- 
nite views as to the merit of the marketing 
machinery. And, of course, he will express 
these views, for the man without positive views 
on the marketing of grain is forsooth deemed 
stupid. Such views are as necessary as those on 
religion or politics or prohibition. 


And to have views on grain marketing one 
must have views on the merit of the Chicago 
Board of Trade, for that exchange is the machin- 
ery by which grain passes through the chan- 
nels of commerce. It is the wheat pit. Long 
has it stood, to many a strange, mysterious giant 


7 


TA VE | WORE AY Tee 


in the center of a warfare handed down by the 
ages. Embattled, victor of a hundred skirm- 
ishes, it is perhaps the most romantic figure in 
the whole world of commerce. ‘There it stands 
today with its old-fashioned high windows and 
its lofty clock tower, brooding over the canyon 
of finance known as La Salle Street. There it 
has stood for a life time, outwardly unchanged 
by the swift passions threatening its downfall. 


Back of these victories by the wheat pit there 
must be a fundamental soundness. Were it not 
so the exchange system should have been wiped 
out in a single fell stroke during one of the in- 
numerable periods of price insanity when public 
fancy swam in the tide of sensation. 


In the discussion that follows it is purposed 
to draw back the veil of mystery and step behind 
the scenes. It is intended to trace in broad out- 
line the story of the grain exchange, setting 
forth some of those characteristics that have made 
it one of the largest of commercial institutions. 
The story is plain; the uninitiated may readily 
observe the wheels go round, and perhaps gain 
an understanding of the wheat pit of today. The 


8 


meee WORE ALT Poli’ 


discussion contains dispassionate facts undiscov- 
ered by some of the “‘economists’’ who are wont 
to master the science of grain marketing be- 
tween the opening and closing gong—from the 
balcony. 


Birth of the Pit 


HITE-TOPPED prairie schoonets 

crawling toward the setting sun. Plains 

flecked with buffalo and antelope. Traders 

gliding up and down interior streams bargain- 

ing for fur. ... Such were the early days of the 
nineteenth century. 


Like the finger of destiny, the historic pilgrim- 
age of pioneers pointed ever westward, strag- 
gling onward in unending lines. ‘“‘Caravans 
of Faith’ they were called as they joggled across 
Illinois and into Jowa. And theirs was a pro- 
found faith, the faith of the dreamer striking 
out for the land of his dreams. 


The acreage which the pioneers planted to 
grain continued widening each year. They 
shipped their grain to Chicago, then an ugly lit- 
tle town cuddled on the shore of the lake. Part 
of the money received in return was quickly con- 
verted into farm implements. These imple- 


10 


ea rem AL YP uD 


ments meant larger production. Subsequently 
the stream of grain that poured into Chicago 
bulged the sides of the little town and made nec- 
essary almost constant expansion of marketing 
and storing facilities. 


/’ There were no established rules in the pur- 
chase and sale of farm products. Farmers sim- 
ply hauled their grain to market over rugged, 
mud-gashed trails and received what the mer- 
chant cared to pay. Unscrupulous buyers took 
advantage of the situation and abuses developed. 
oreover the shady practices went unpunished 
for the simple reason that_there was no way of 
determining actual values! ~ 









In 1848 a group of eighty-three highly re- 
putable merchants determined to put an end to 
the chaotic conditions in the grain trade. “hey 
cathered in response to a general call and forth- 
With organized the Chicago Board of Trade. 

he purposes as laid down then and as followed 
today were to maintain an exchange, promote 
uniformity, enforce justice, and gather and dis- 
tribute commercial information. =“ 


It was an important move. ‘The press hailed 
it as a forward step of first magnitude. ‘The 


11 


THE OW HR EA ee 


news overshadowed the other salient news of 
the day—passage of an ordinance ending “horse 
racing and careless shooting on Chicago’s prin- 
cipal streets.”’ 


At once the exchange set about enforcing rules 
which eventually drove from the field those mer- 
chants who had prospered unfairly at the ex- 
pense of the farmer. Throughout the grain 
district there developed a faith in the new ex- 
change which never wavered over a long pe- 
riod of years. Indeed, for half a century the 
Chicago Board of Trade was one of the lead- 
ing factors in the upbuilding of Chicago and the 
central west:~’ 


Growth of Chicago as a grain exchange was 
amazing. But so was the expansion of agricul- 
ture. In the two hundred and fifty years pre- 
ceding 1860 a total of only 407,000,000 acres 
of land had been incorporated into farms. From 
1860 to 1900 some 431,000,000 acres were 
added, more than doubling the farm area. In 
1860 there were but 30,000 miles of railroad 
lines. In the next forty years 162,000 miles of 
the shiny rails bit their way across the continent, 
forming a network of transportation. 


12 


eae we ABCA OP Lk 


So from a wagon-load market Chicago—rose 
to premier grain market of the entire world At 
length it became the gateway to a vast garden 
that sprawls out over an area wide enough to 
contain a score of small nations. Its position 
on the eastern rim of the wheat area and on the 
northeast corner of the corn belt made it a nat- 
ural market for grain. 


“Phantom wheat’ was a favorite cry of ex- 
change critics during the recent post-war agra- 
rian unrest. But there is really nothing ghostly 
about the tremendous volume of grain received 
at Chicago. Four hundred million bushels is the 
annual total. It is equal to twenty trainloads 
of fifty cars each for every working day in the, 
year. Two million bushels of wheat has been ) 
received in a single day. 


Sheer growth of agriculture heaped marketing 
problems upon the grain exchange from its very 
inception. One by one these problems were 
ironed out, sometimes slowly, painfully, only to 
be followed by others of equal weight. So it 
has not been an easy road—at least not a road 
for tender or for casual feet—along which the 
exchange has wavered since those dim days of its 


birth. 
13 


Futures 


a fa AGICAL changes were wrought by the 
[WH civil war. These changes were economic 
as well as social. One of them reached out into 
the marketing of grain. For during the conflict 
there was created the nucleus of the present grain 
futures market. 





‘The government wanted to erase all doubt as 
to definite supplies at certain future dates. At 
the same time it desired to shift the risk to a 
single responsible individual instead of scatter- 
ing large contracts among a number of Chicago 
men. 


‘This one man did assume the enormous risk 
of the government contract, but he immediately 
interested a number of other men and thus suc- 
ceeded in spreading the risk among many. These 
other men agreed to deliver to him at certain 
future dates specific amounts of grain at a stipu- 


14 


mew e AN Li Pid 


lated price. The aggregate of these amount 
equaled the government contract. These were 
the first contracts for the future delivery of 
grain. 


So successfully did the plan serve in the case 
of government war requirements that it contin- 
ued to expand after the war and at length became 
a vital part of the whole grain marketing sys- 
tem. It originated as a means of protection an 
such is its purpose today. 


As agriculture enlarged and commerce de- 
veloped the futures market became too narrow to 
perform the service intended. It was difficult to 
quickly bring together buyers and sellers of the 
particular grade of grain being exchanged. De- 
lays involved extra costs and confusion. 


To solve the problem of a ready buyer and a 
ready seller there grew up a branch of the grain 
trade commonly referred to as the speculative 
class. ‘his speculative division, always in the 
market prepared to either buy or sell at any 
minute of the business day, enabled the man 
desiring grain at some future time to make his 
purchases months in advance. He was sure of 
receiving the commodity at the price agreed upon. 


15 


THE WH EVAGT eee 


It likewise enabled the man desiring to deliver 
grain at some future time to sell that grain at 
any minute of the market day, with the privilege 
of delivering it during the future month agreed 
upon. 


Thus the futures market became broad and 
liquid. Business was facilitated. Eventually 
leading economists credited the Chicago futures 
exchange with remarkable accuracy in the regis- 
tering of grain prices. It was also credited with 
being by far the most economical distributor of 
staple foodstuffs. 


Nevertheless it is a singular fact, as pointed 
out by Van Buren Denslow in his Principles of 
Economic Philosophy, that “‘markets have been 
the subject of popular prejudice and moral ob- 
jection, almost in proportion to the perfection 
with which they economize time, transportation 
and effort, and equalize prices.”’ 


This authority further says that a market 
rises into its highest value when it concentrates 
into one focus so large a portion of the buyers 
and sellers of a certain commodity as to become, 
in conjunction with one or two other markets 
of the same kind, an authoritative standard of 


16 


Pee Win EA Died 


prices of the articles in which it deals, for all 
buyers and sellers throughout the world. 





“Most advanced and useful markets,’’ he says} 
“are those whose prices are most widely authori- 
tative. In grain these are the Chicago, Liverpool | 
and New York exchanges. ‘The instant a price | 
is made buyers and sellers all over the world y 
deal in accordance with it. If each dealer had to 
wait until he himself could learn the causes in- 
fluencing supply and demand commerce would 
be paralyzed.”’ 

Three factors are locked together in the pres- 
ent system of grain marketing. ‘They are specu- 
lation, futures trading and hedging, which is a 
form of commercial price insurance that will be 
fully discussed later on. Without speculation 
there could be no futures market. And with- 
out a futures market the hedge, so invaluable to 
the farmer, elevator man, miller and exporter, 
would be at once eliminated. 


Learned jurists and economists have time and 
again warned that law-making bodies should ap- 
proach the grain futures market only in the most 
cautious manner if they were to avoid destruction / 
of the hedging facilities. | 


17 


THE (WA. & Avil ae 


Senator White, who later became Chief Justice 
of the United States Supreme Court, character- 
ized the futures market as an agency of great 
service to producer and consumer. 


“The system of future dealing as found in this 
country today is a part of the common acquisi- 
tion of the human mind for the past two hun- 
dred years or more,’ he said. ‘There is no 
political economic writer in any language recog- 
nized as authority, unless he be tinctured either 
with socialism or communism, who does not ap- 
prove of these contracts and state that they are 
necessary for the development of commercial af- 
fairs and that they operate wisely and beneficially 
upon both the producer and consumer.’ 


18 


Speculation 


UBLIC fancy has associated speculation 

with something deeply sinister. “The out- 
standing figures in the speculative profession 
have been pictured at times as spectres that prowl 
the channels of commerce, biding their time, and 
then striking down their prey with lightning 
speed. Curiously there has always been some 
doubt as to the precise identity of the prey. 


ception, speculation is recognized as a part of the 
great system of distribution to which credit and 
transportation belong. In its way it performs 
the same general service. It facilitates the dis- 
tribution of products to consumers. Henry 
George likened speculation to a balance wheel 
by which the whole machinery of industry is 
regulated. Mr. Justice Hughes of the Unite 

States Supreme Court said speculation ‘‘consists 
in forecasting changes in value and buying and 
selling to take advantage of them.” 


Contrary to this rather widespread ea 


19 


TO AOB WANE AV ie 


In a celebrated decision in which the Supreme 
Court sustained grain exchange contentions, Mr. 
Justice Holmes pointed out that “in a modern 
market contracts are not confined to sales for 
immediate delivery.”’ 


“People will endeavor to forecast the future 
and make agreements according to their proph- 
ecy, he said. “Speculation of this kind by com- 
petent men is the self-adjustment of society to 
the probable. Its value is well known as 
a means of avoiding catastrophes, equalizing 
prices, and providing for periods of want. It 
is true that the success of the strong induces imi- 
tation by the weak, and that incompetent persons 
bring themselves to ruin by undertaking to 
speculate in their turn. 


“But legislatures and courts generally have 
recognized that the natural evolutions of a com- 
plex society are to be touched only with a very 
cautious hand, and that such coarse attempts at 
a remedy for the waste incident to every social 
function as a simple prohibition and laws to stop 
its being are harmful and vain.” 


Speculation’s service to society, then, is in 
avoiding or mitigating catastrophes, equalizing 
prices, and providing for periods of want. 


20 


memes) Wit EB VAT Pal 


Abundant proof is available that this service 
is actually performed by the grain futures market. 
It has been shown, for instance, that had specu 
lation in grain suddenly ceased in the summer of 
1920, when post-war prices began tumbling, the 
resultant situation might well have been termed 
a catastrophe. And precisely that very thing 
happened in wool, hides, leather, tobacco, silk 
and scores of other articles which are not com- 
modities of speculation on the organized ex- 
changes. In this connection, there has been a 
strong movement in recent years toward extend- 
ing the futures trading system to other com- 
modities. [he single purpose is price ae) 
tion. he ruinous price swings in commodities 
not dealt in upon the futures exchanges are a 
dreaded hazard to which the owners of the com- 
modity must submit. It is but necessary to com 
pare prices of such commodities over a period of 
years with the price of grain to understand how 
the futures market eliminates the risks of grain 
ownership. 


It has been fairly asserted that the most use- 
ful portion of the speculative class are those who 
speculate in commodities affected by the vicissi- 
tudes of seasons. 


21 


TH\IE WHEAT (Pea 


Without wheat speculators the price varia- 
tions would be much more extreme than at 
present. Moreover in a deficient season the needed 
supplies might not be forthcoming at all. With- 
out speculation the price in a season of abundance 
would fall without limit or check, with the 
danger of wasteful consumption bringing on a 
later famine. John Stuart Mill stresses these 
points clear and sharp in his Principles of 
Political Economy. 


Critics of the grain futures market, while de- 
fending its hedging facilities, have attacked the 
vast volume of speculative transactions. It has 
been claimed, for example, that the futures trades 
on the Chicago Board of Trade are several times 
the nation’s total wheat crop. 


( ‘To the layman this is an arresting thought. © 
‘And many a farmer has been disturbed by the 
notion that his wheat was sold over and over 
from the time it left his wagon until it reached 
the ultimate consumer. The fact is that the 
volume of futures trading has no effect upon 
price other than to add stability. 


if In the futures market the trading is in wheat 
Canin The same contract may pass through 


22 


Pee, UW EV AYE «PAD 


the hands of a dozen ora score of buyers an 
sellers, each time adding to the volume of futures 
transactions. Hence the large total as compare 
with the actual crop. 


But this volume is no more striking than the 
enormous disproportion between the currency of 
the country and contracts for the payment of 
money. ‘These contracts are set off in the clear- 
ing houses of the banks. No one ever dreams of 
attacking their integrity. 


For example, at this writing the savings ac- 
counts total some twenty thousand million dol- 
lars. Yet the Treasury Department report shows 
that all the money circulating in the United 
States amounts to only four thousand seven hun- 
dred and seventy-six million dollars. Note the 
wide disproportion. 


Five times as much money is in the banks 
today as there is in all the United State com- 
bined. “The answer is simple. ‘The same dollar 
is used over and over, just as actual wheat is 
contracted for over and over again. Should all 
depositors of banks and trust companies ask for 
their money at once, it is estimated they would 
receive no more than 10 per cent. Yet their 
money is perfectly safe. 


23 


THE OW AE AT Sie 


Chicago is the clearing house of the world 
wheat trade. Accordingly vast quantities of 
wheat that never were intended for shipment to 
Chicago are hedged in that market. It is the 
price insurance center, used constantly for in- 
surance purposes by dealers of Europe, Argen- 
tina, Australia, Canada, and a score of American 
interior and export cities. 


Millions of bushels are handled annually by 
Chicago merchants, which have been purchased 
by outside dealers in one market and consigned 
to another. In such cases Chicago’s future mar- 
ket simply furnishes the price insurance. 


Speculative trading must be broad in order to 
provide a market that will give the necessary pro- 
‘tection. And the protection is indeed necessary, 
for prices are affected by drought, rain, heat, cold, 
good crops and bad crops, foreign supply and 
demand, transportation, embargoes, panics and 
boycotts. All these factors are registered 
promptly in the futures market. There can be 
no absolute stability of grain prices unless there 
is absolute stability in those conditions which 
make prices. Grain prices fluctuate simply be- 
cause the conditions that control prices fluctuate. 


24 


Pepe kW BAT Pal or 


When prices fluctuate downward there is a 
speculative class ready to absorb offerings and 
prevent a slump to artificially low levels. Con- 
versely, when prices rise out of bounds, the 
speculative class again becomes a stabilizer. / 


Cause for price fluctuations may be understood 
when one considers the difficulties in determin- 
ing supplies, present and future. Dealers do not 
face actual supplies but estimates of supplies 
which change hourly. 


Receipts at the market are a more important 
supply factor than the crop. Back of the re- 
ceipts is the grain actually in terminal elevators, 
known as the visible supply. Back of this is 
the estimated holdings of some twenty thousand 
country elevators, and back of these are the esti- 
mated holdings on two or three million farms, 
which are always a factor of great uncertainty. 


Therefore the supply of merchantable grain 
that may come to market, and is vitally import- 
ant in price making, is but vaguely known and 
changes with all new information. With the 
best avenues of knowledge in the world, there 
are such possible errors in advance estimates of 


25 


T AOE. We EB AV apa 


supply and demand that it is impossible to ac- 
curately forecast the price movement. It fre- 
quently happens that months must pass before 


the relation of supply to demand can be closely 
determined. 


Consequently, merchants, millers, exporters 
and others interested must exercise infinite cau- 
tion to avoid disaster. 


While the ill-informed have on occasion at- 
tacked the volume of trading in the futures 
market, they have never questioned the integrity 
of the grain contract. It is a highly-developed 
form of credit. Aside from bank credit, it is the 
most liquid contract in existence. Courts have 
given these contracts the stamp of approval, as 
has also the United States government. They 
are never called into question. 


If the holder of one of these futures contracts, 
whether he be speculator, merchant or exporter, 
wishes to have his grain, it will be forthcoming 
at the time fixed by the contract. He will find 
that the grain is neither phantom nor mythical. 


26 


SLALOM ANN UAE 9 abd lay LAL BRO wale d Ad 


In this connection, authorities have pointed 
out that the volume of these futures contracts, 
whether speculative or not, is of no real conse- 
quence so long as the integrity of the contract re- 
mains unquestioned. The greater the volume the 
less costly is the operation of the marketing ma- 
chinery. 


27 


Hedging 


HIS has been called the age of insurance. 

One may insure against virtually every 
known risk. “The carnival man insures against 
rain. ‘[he farmer against droughts or hail or 
tornado. ‘The steamboat company against dis- 
aster at sea, and the star dancing girl against in- 
jury to her legs. A merchant who fails to insure 
his wares against fire is deemed stupid and in- 
competent. 


Hedging is simply another form of insurance. 
It is a commercial price insurance which protects 
the owner of grain against price fluctuations. It 
makes dealing in actual grain a safe business. 


In sustaining the legitimacy of futures con- 
tracts on the Chicago Board of Trade the United 
States Supreme Court called hedging “‘a means 
by which collectors and exporters of grain or 
other products and manufacturers who make 
contracts in advance for the sale of their goods, 


28 


Pee Wilk Aik) Pilih 


secure themselves against the fluctuations of the 
market by counter contracts for the purchase or 
sale . . . of an equal quantity of the product.”’ 


Cost of the futures market with its hedging 
facilities is very low as compared with premiums 
on other forms of insurance. It has been figured 
that maintenance of the futures market ex- 
acts a toll of about two-fifths of a cent a bushel 
on the whole crop. Without this insurance the 
producer would receive less for his grain and the 
consumer would pay more. In markets having 
no hedging facilities the additional toll has been 
placed at approximately ten cents a bushel. 


‘Therefore it may be readily seen why even the 
most aggressive critics of the grain futures ex- 
change become alarmed over any move to inter- 
fere with the hedging market. Its economic 
value is recognized by all. Russia had no fut- 
ures or hedging market when it was a great 
wheat producing country before the war. And 
prices paid the farmer were relatively much 
lower than in the United States and Canada or 
in any western European country. 


Hedgers in the futures market may be divided 
roughly into two classes. [There are those who 


29 


TO AvE Wo EV ANT 


sell futures against grain they own. And there 
are those who buy futures against sales of actual 
grain or flour. 

Those selling futures in the pit as a hedge 
against grain they own include line elevators, © 
which are companies having a line of elevators at 
country railway stations; country shippers 
which are called independent elevator companies 
and farmers’ elevators companies; big farmers 
and terminal elevator companies at the market 
centers. 


Those who buy futures as a hedge against 
sales of grain and flour are millers, local 
elevator shippers at every market center, grain 
commission houses and exporters at the seaboard. 


Here it should be pointed out that the daily 
transaction of these buyers and sellers in the 
hedging markets do not by any means balance. 
Such a condition is impossible. The balance, 
as mentioned elsewhere, is maintained by the 
speculative division of the market. Without 
speculation the hedging market would be nar- 
row, there would be crazy price gyrations and 
the whole purpose of the market would be de- 
feated. 


> When the crop is moving freely 
@ line elevator company, with perhaps 
fifty houses in the country, may buy 
a thousand bushels of wheat a day at 
@ach Station. it is the: business of 
Such companies to buy grain on & reason- 
able Margin and to sell it again as 


quickly as possible. These companies 
do not Gare to speculate. . They know 
that it would be speculation to own the 
wheat a single day without hedging, 

for the price very likely would be 
higher or lower at the end of the next 
twent;-foOur hours, 








meee WHE AT Pil tT 


Hedging begins in June or July in the winter 
theat markets and early in August or September 
1 the spring wheat centers. During the next four 
1onths it is heaviest because of the movement of 
ae wheat and oats crops. New corn crop hedg- 
1g does not begin on a large scale until December. 


When the crop is moving freely a line eleva- 
or company, with perhaps fifty houses in the 
Juntry, may buy a thousand bushels of wheat 
day at each station. It is the business of such 
»mpanies do not care to speculate. They know 
ad to sell it again as quickly as possible. These 
»mpanies to buy grain on a reasonable margin 
vat it would be speculation to own the wheat 
single day without hedging, for the price very 
kely would be higher or lower at the end of 
le next twenty-four hours. 


So as the actual wheat is accumulated by one 
* these companies, sales of an equal amount are 
ade in the wheat pit as a hedge. If the com- 
iny buys fifty thousand bushels of wheat in 
1e day it will sell in the wheat pit a contract to 
‘liver fifty thousand bushels of wheat during 
certain future month. As the company dis- 
ses Of the actual wheat, it buys back in the 


31 


T HE (WHE AT eee 


wheat pit the same volume which it had sold 
for future delivery. 


Thus it is protected against price fluctuations 
while holding the physical wheat. For should 
the price of wheat go down, an offsetting profit - 
is made on the futures contract. Should the 
price go up and involve a loss on the futures con- 
tract, it is offset by the rise in value of the actual 
grain. Thereby the company makes precisely 
what it set out to make, which is a fair merchan- 
dising profit. 


In like manner a country elevator will hedge 
its holdings. If it places five thousand bushels 
of wheat in its elevator, it will wire its represen- 
tative at the futures market to sell a like amount 
for delivery at some future date. “The company 
still owns the wheat in its house. But it has 
made a contract to deliver a like amount during 
a certain month, the actual day of the month be- 
ing optional with the seller. 


Thereafter the country elevator is disinter- 
ested in price fluctuations. “The hedge will pro- 
tect whether the price rises or falls. The ele- 
vator company’s profit is in the difference be- 
tween the price paid for the wheat in the country 


32 


meee Wie BACT Pal af 


and the price at which the future was sold, less 
freight and other charges. 


Terminal elevator companies buy the day- 
to-day surplus at the markets and carry it until 
decreasing supplies late in the winter and in 
the spring bring forth a demand. They are 
located at the market centers. At most markets 
they buy their grain at the exchanges instead of 
in the country as in the case of the line elevators 
and farmers’ elevator companies. 


Five million bushels of wheat carried by a 
terminal elevator company would be an enor- 
mous risk without the protection of hedging. 
So as rapidly as the wheat is accumulated the 
company hedges by selling an equal amount of 
futures in the wheat pit. 


Hedging has a vitally important bearing upon 
the crop movement. For instance, banks loan 
money readily on grain in store. ‘They loan 
almost up to its market value if the grain is 
hedged. Should elevator companies fail to 
hedge their grain the banks would look upon 
them as speculators with dangerous risks. Un- 
der present conditions terminal elevator compan- 
ies, carrying millions of bushels of grain, are 


33 


T HE \W: HE AW! eee 


enormous borrowers. of money. Nor do they 
have any difficulty in obtaining these funds 
when their grain holdings are insured in the 
hedging market 


Millers are by far the largest class among those 
who buy futures as hedges against grain and 
flour. It has been estimated that the hedges of 
millers in various markets equal as much as 
400,000,000 bushels of wheat annually. This, 
incidentally, helps to account for the very large 
volume of futures as compared with the na- 
tion’s annual crop. 


Millers may sell by early autumn all the flour 
they can make by the first of the year. As they 
contract to sell the flour they make purchases of 
Wheat in the futures market. It would be im- 
possible for them to buy an equivalent amount 
of actual wheat of the new crop when they are 
contracting ahead for sale of flour. The new 
crop wheat would not as yet be available. Even 
if it were mills could not buy it unless they 
owned most of the line and terminal elevators, 
for the problem of financing and storing would 
be too great. 


A mill may have in July an order for ten 
thousand barrels of flour to be shipped in Sep-- 


34 


Pm wi Wi By AG. YPOled 


tember. ‘he price of the flour cannot be based 
upon the prevailing price of cash wheat. It must 
be based upon the probable price of wheat in 
September. And the only place in which that 
price is determined is the futures market. 


When it has contracted to deliver the flour in 
September, the mill at once buys an equivalent 
amount of wheat in the futures market for Sep- 
tember delivery. “Then the mill is hedged and 
unconcerned with price fluctuations, for like the 
elevator man who is hedged, a loss on the futures 
contract will be offset by a profit on the actual 
wheat, and vice versa. 


As soon as the mill buys its actual wheat with 
which to fill its flour contract, it closes out the 
hedge in the futures market. In the meantime 
the element of speculation has been eliminated. 


Millers of the United States grind approxi- 
mately 600,000,000 bushels of wheat annually, 
being the ultimate buyer of 80 percent of the 
American farmer's wheat. “They contend elim- 
ination of price interest with such a large buying 
element is most desirable, and that such a large 
purchasing power should be utilized to stabilize 
wheat prices. “Ihe miller should receive his re- 


35 


T HE Wt E Acta 


turn from the manufacture and distribution of 
wheat products and not from the purchase and 
sale of the raw material. Hedging makes that 
possible. 


- There are a number of reasons why a miller 
must buy wheat.in excess of flour sales or con- 
versely. One of the largest millers in the world 
explained some of these reasons to congress by 
pointing out that production of wheat 1s sea- 
sonal, flour demand is periodic, and the periods 
of heaviest wheat offerings and heaviest flour 
demand do not necessarily occur at the same 
time. 


“The areas of greatest consumption both dom- 
estic and export are east of the large fields of 
wheat production,’ he said. “Seventy per cent 
of all the flour produced in the United States is 
in direct proximity to the fields of wheat pro- 
duction. The movement of grainand grain 
products is from west to east. 


“Wheat must be bought by the miller when 
it is offered, otherwise it flows by the mill door 
and passes to export. The miller must, regard- 
less of immediate flour sales, maintain at or back 
of milling centers sufficient supplies to meet fu- 


36 


ME OWHE AT PIT 


ture flour demand. He must sell flour when the 
demand exists regardless of his ability to buy im- 
mediate wheat supplies. 


“He must maintain a flow of eat to the 
mill to insure operation and a flow of flour to 
the consuming points to meet occurring demand. 
Otherwise continuity of operations would be im- 
possible and inadequate flour supplies would re- 
sult from-time to time. 


“How can the miller buy wheat in excess of 
his flour sales or sell flour in excess of immediate 
wheat supplies without interfering with the free 
reflection of actual values? 


“We maintain that the miller who utilizes 
the present marketing facilities and sells a fu- 
ture wheat contract against his wheat purchases 
or conversely purchases a future contract against 
flour sales, is not interested in the price levels 
except that they should so far as possible be the 
same in both cases. It matters little if he 
contracts at $1, $2, or $3 a bushel, provided his 
sales of wheat or flour reflect similar prices. 


“It is clear therefore that he is not interested 
in enhancing or depressing prices and that the 
volume of his transactions flows through the 


37 


TUACE Wh EB AT Va 


markets at current prices without interference. 
His operations are reduced so far as possible to 
actual manufacturing only. 


“On the other hand, it is apparent that the 
miller who does not use the contract facilities 
and whose position is therefore directly affected 
by the rise or fall of prices, must necessarily pos- 
sess a very decided price interest. “The volume of 
his transactions must necessarily become a factor 
and an important one in influencing price as his 
position demands that he should buy at the low- 
est and sell at the highest levels. 


“Under our present system, in futures con- 
tracts, the margin as between producer and con- 
sumer is not only extremely narrow, but lower 
than in any other country. ‘This is due largely 
to the features of safety embodied in the present 
grain machinery and extended to those who un- 
dertake the marketing of our great wheat crop. 
‘These features operating successfully over a con- 
siderable period of time have inspired financial 
confidence to an extent that makes the advances 
necessary to move and market the crop readily 
available.” 


Exporters of grain utilize the futures market 


38 


Pe We BAR Be bot 


———— 


for hedging purposes to a very large extent. [he 
exporter will contract to sell grain abroad before 
he has purchased the actual grain in this country. 
But when he enters into the foreign contract he 
will buy in the futures market an amount equal 
to his sale abroad. ‘The price will enable him 
to deliver the physical grain abroad at a profit. 
In the meantime he need not fear a rising market, 
for he is safely hedged. His transaction becomes 
a plain business deal and not a speculation. 


‘There can be no doubt that without the specu- 
lative market with its hedging facilities the grain 
business would eventually become concentrated 
in the hands of a small but powerful group. Large 
capital would be necessary. Small dealers and 
the present highly developed competition would 
be eliminated. 


It is a gfotesque error to assume that the specu- 
lative wheat market with its hedging facilities is 
not a benefit to the farmer as well as to the man 
in the street. 


39 


That Wicked 
Short-Selling 


IKE the sword of Damocles there hangs 
over the man who sells wheat short an old 
pit adage which runs— 


He who sells what isn’t his’n 
Must buy it back or go to prison. 


Homely as it is, this little couplet expresses a 
truism so fundamental that it has lived in that 
precise phraseology for half a century despite the 
obvious lack of word-magic on the part of its 
author. The pit knows the meaning. 


Perhaps of all the market bugaboos that have 
stalked the marble halls of court and congress, 
none has caused such consternation as that of 
short-selling. It is the eternal signal for trem- 
bling and quaking and viewing with alarm. 


In the records it is written that the one time 
Abraham Lincoln used stout language in the 
White House was when he said to Governor Cur- 


40 


eae Wel A I Pon TL 


tin during the Civil War crisis: ‘“What do you 
think of those fellows in Wall Street gambling 
in gold at such a time as this? or my part, I 
wish every one had his devilish head shot off.” 


A corrective law was enacted at once, but was 
removed from the books a few days later because 
the government’s attempt to limit the market 
only made matters worse. ‘The speculation and 
short-selling in time proved beneficial to the 
country, while the law did precisely what it 
aimed to prevent. 


In order to protect their mercantile business, 
countless people had been compelled to sell gold 
short, expecting to cover later on. Instead of be- 
ing wicked gambling, this proved to be sound, 
legitimate commerce. ‘“The event,’’ wrote Presi- 
dent Hadley of Yale in the Cyclopedia of Poli- 
tical Science, ““‘proved that gold speculation had 
been the means of steadying the market.” 


“A short sale is not a gambling operation,” 
declared Judge Barnard of the Circuit Court of 
the District of Columbia, in rendering a judg- 
ment in a celebrated Stock Exchange case. ‘“The 
law defines a gambling operation to be one where 
the parties make a contract of purchase and sale 


41 


TAHOE Wi Hi Be AUT” eae 


without intent on the part of either to deliver or 
receive the article named in the contract. Nothing 
passes between the parties beyond the money 
from loser to winner, and nothing else was in- 
tended to pass. his is a mere bet—a gamble. 


“But where actual delivery is made of the goods 
contracted to be sold and received, the transaction 
becomes a commercial one. The testimony shows 
that in a short sale delivery of the stock sold is 
made, and the purchase price paid. hat fact 
establishes it as a commercial transaction. It may 
be speculative. Itis speculative. But commercial 
transactions generally are more or less speculative, 
the speculative element in them varying mainly 
in degree.”’ 


Since the very inception of the futures markets 
it has been common knowledge that the vast 
majority of speculators are buyers rather than 
short-sellers. Some authorities have asserted that 
nine of every ten men engaged in grain speculation 
are “‘bulls’’; that is, they believe in higher prices 
and direct their efforts accordingly. 


‘“The average man,”’ said one of the nation’s 
greatest financiers, ‘‘is a bull on the United States 
of America.’”” And that is as true in the grain 


42 


eee a WBA TPP ST 


market as in all other lines of commercial 
endeavor. 

Except under extremely rare and unusual con- 
ditions, the short-seller is not able to unduly de- 
press the price of wheat. For the very minute 
wheat prices sink below a parity with world 
values, exporters and foreign buyers seize upon 
the offerings. Millers likewise grasp the oppor- 
tunity and the rebound to normal levels is quickly 
brought about. 


Those who would correct the real or fancied 
evils of the futures market have sometimes sug- 
gested that short-selling be eliminated. “The spec- 
ulator would be permitted to buy contracts for 
the future delivery of grain. But he would be 
restrained from selling a contract to deliver a cer- 
tain amount of grain at a certain future time. 


‘This proposal has been based upon the fallacy 
that the short-seller depresses prices by tossing 
upon the market a supply of what has been re- 
ferred to as fictitious grain. Anyone familiar 
with the marketing machinery will readily ob- 
serve the weakness of such a proposal. 


In the first place, the market would be thrown 
off its balance and completely upset if speculative 


43 


THE: OW HE ACT ae 


buying were permitted and speculative selling 
prohibited. If speculators were permitted only 
to buy first and sell last it might be possible to 
run prices up to ridiculous levels for the simple 
reason that there would be no influence to coun- 
teract such a course. he bubble would burst, 
of course, and the drop would be severe. ‘Then 
it would be discovered that the whole futures 
market had been destroyed. 


There is little of merit in the statement that 
short-selling depresses prices by creating a ficti- 
tious supply. If the supply of wheat were to be 
judged simply by the amounts offered for sale 
there might be some reason in the argument. But 
in a broad, liquid market where there is displayed 
all the crop information of the world, the volume 
of grain offered by short-sellers has no bearing 
whatever on the condition of actual supply. The 
short-seller by no means creates a fictitious supply 
of grain. Nor is he able by any such process to 
depress prices. 

In considering short-selling, the point that 
should be kept in mind is that the short sale is 
also a purchase. “There could be no short sale if 
there were not a buyer to take the other end of 


44 


fer Wille BACT PIP OT 


the transaction. ‘The short-seller always finds 
the buyer who believes in a higher price level. A 
multitude of buyers are greedy to accept offers 
that appear lower than the world situation would 
justify. Any depressing influence then is offset 
by the elevating influence of the purchase. 


Even were the immediate effect of the short 
sale a depression of prices, it would later bring 
about an equal influence for a rise. For, just as 
the old pit adage warns, every man who sells 
must subsequently make a purchase of the same 
amount. ‘Therefore if his short sale were of such 
a character as to depress the price, his later pur- 
chase would bring about an enhancement. 


It is difficult to determine where short-selling 
has any effect whatever upon the general market 
trend, particularly in a market of such vast 
volume as the Chicago exchange. 


Records of the past thirty years show that any 
artificial price situation was almost invariably of 
the upward character, which is in line with the 
general contention that ninety per cent of the 
speculators are on the bull side of the market. 


Short selling is simply a balance wheel. And 
a mighty valuable one. 


45 


On Cornering Grain 


T is almost as easy to corner the stars in the 
sky as to corner the wheat market of today. 


‘That remark was made one day by a veteran 
of the exchange. He had been a member for half 
a century. From those dim days when grain 
marketing became his life’s work he had passed 
through all the storms that kept the exchange 
tossing about on a sea of turmoil. 


“Stop ten men on the street and nine of them 
will be of the firm belief that cornering grain is 
almost an every day occurrence,” he said. “Yet 
there has not been a corner in years. And there 
never will be another corner for the simple reason 
that exchange rules and rigid supervision by the 
federal government make such a condition ut- 
terly impossible. 


“Long ago when disgraceful land frauds were 
being perpetrated and railroads were engaged in 


46 


mee AWA EY AST A Pal 


amazing cut-throat methods, the grain exchange 
was the scene of real and attempted corners. But 
those were the slumming days of commerce. 
Business was feeling its way. Ethics were mis- 
erably low. Practices that would be darkly 
frowned upon today were winked at in most 
every commercial line. So in its period of grow- 
ing pains and wild oats the grain exchange was 
not without company. 


“But remember this. Grain exchanges did not 
introduce corners. Corners were handed down 
by antiquity. It is written that Joseph con- 
ducted the first successful corner in grain. Phil- 
osophers and historians including the great Aris- 
totle tell us of corners in food and other necessi- 
ties by ancients crafty and unscrupulous, and by 
ancients judicious and long-headed, whose fore- 
sight warned them months in advance of certain 
critical events. 


“Men of such superior intellect and vision, 
who foresee probable future events, have always 
prospered and will continue to prosper. In much 
lesser degree has prosperity shone upon those 
crafty and unscrupulous men who have sought 
through artificial means to profit by the distress 
of their fellow man. 


47 


T A\E WHE AV eae 


“In the rude, embryonic days of the exchange 
there were grain corners good and bad. Most of 
them were distinctly bad. And here is a curious 
fact that for some reason has never been realized 
by the public. Nearly every grain corner ever at- 
tempted was a failure and brought financial ruin 
to the perpetrator. Still another fact should be 
borne in mind. ‘The man who attempted to run 
a corner always forthwith became the enemy of 
the exchange. He was an outlaw with the trade 
generally, a fugitive that had to be disarmed if 
members of the exchange were to be afforded any 
measure of protection. 


i “It was common practice in the old days to 
/ refer to every tight situation in the market as a 
corner. Many so-called corners were nothing 
more than natural conditions. It is true that 
those who anticipated such conditions profited. 
But they were following the trend rather than 
creating it. 


“There were three so-called corners in the his- 
tory of the exchange of sufficient magnitude to 
remain in public memory. One was really not a 
corner at all, one ruined the man who tried it, 
and one was a temporary success. [hey came 
ten years apart. 


48 


meee WE AM ee Pek sy, 


“B. P. Hutchinson, that most fascinating of 
grain market plungers—hated, loved and feared— 
by bold strokes with his personal fortune was a 
dominating figure in grain during 1888. ‘The 
government report in May predicting a wheat 
shortage found ‘Old Hutch’ a seller of wheat. 


“After a temporary rise prices slipped down- 
ward until July, showing large profits for Hutch- 
inson. [hen in August he took the buying side, 
accumulating a large volume of September wheat. 
Frost damage and a tightening European situa- 
tion created fear. Hutchinson received and paid 
for quantities of actual wheat, and by late Sep- 
tember the price for September wheat rose to two 
dollars, the Northwest in the meantime having 
suffered a staggering crop disaster. 


“Old Hutch made a huge sum through his 
ability to judge the course of prices and switch 
from one side to the other. Fundamental factors 
were with him, and his attempt to enhance prices 
certainly was a temporary success. ‘The next 
year he again tried and failed. 


“In later years he fed his fortune back into the 
market from which it came and died a poor 
man. 


49 


T ACB OW ACE AQT 


“Then in 1898 there was the so-called Leiter 
deal. Joseph Leiter had accumulated wheat in 
1897, believing in a later shortage. The price 
rose steadily, but the high prices attracted large 
receipts. Speculation turned to December wheat. 
and there were large exports, supposedly a part 
of the Leiter plan. Great quantities were later 
received in Chicago, most of the wheat going to 
Leiter. One big operator chartered a score of 
lake vessels and with a small army of ice-breakers 
and a fleet of tugs brought cargoes of wheat from 
the Duluth harbor. Leiter’s puny attempt to 
stem the tide failed. Prices finally collapsed and 
his losses totaled millions. “The attempted cor- 
ner was a complete failure. 


“The so-called Patten corner of 1909 was not 
a corner at all. Prices rose in May of 1908 from 
general bad crop conditions, and in the fall heavy 
exports, combined with other factors had reduced 
our supply. In the meantime Patten had been 
credited with buying, and to critics he properly 
replied that he had bought wheat and put it in 
store, thus keeping it in America. ‘This event- 
ually proved to be a service worth while. High 
prices, he said, were due to supply and demand, 


50 


Serer Wen BALL Pyle 


and this statement was true, for prices remained 
high until the new crop came in. June wheat, 
with no semblance of a corner, rose above May 
wheat. 


“Incidentally, all these attempts, like smaller 
ones, carried prices higher and complaint from 
the farmer was not heard. 


“Tt is no small task to eliminate abuses in an 
industry as widespread as grain marketing. But 
the exchange, particularly in the last decade, has 
given a good account of itself. Its progress has 
come from within. After years of most bitte 
and costly warfare it drove the bucketshops out 
of existence. It wrote into its rules provisions 
which would prevent any sane man from risking 
his fortune in an attempt to actually corner 
grain. A man of great means might tempo- 
rarily affect the course of prices, but he could not 
run a corner regardless of funds available. 


“Besides the rigid rules of the exchange, the 
United States government directly supervises the 
market. Under the Grain Futures Adminis- 
tration all information as to volume of trading 
on the part of any single individual or any group 
of individuals is made available to the govern- 


51 


To ACE WOR VE VA i 


ment. A corps of government agents is con- 
stantly on hand and the market is kept under 
close scrutiny. Severe penalties are provided 
under this law. ‘The act goes so far as to au- 
thorize the government to revoke the privileges © 
of a futures contract market in event the exchange 
fails to fully observe the conditions laid down in 
the law. 


“Today the grain exchange is an open book. 
And an attempt to corner its commodities is 
either madness or utter stupidity. [he days of 
corners are buried with the past.” 


52 


“Let's Investugate” 


RAMERS of the constitution, guided by 

the eternal principles of justice, set forth 
certain individual rights. [hese rights were 
inalienable. They were not to be invaded. 
They were free from regulation by force. 


Secure under these righteous principles of the 
constitution, farmer, merchant and _ artisan 
forged steadily ahead. In America individual 
initiative was ever the driving force. It trans- 
formed rugged lands into highly productive 
areas. It built highways and railways and opened 
up giant arteries of trade. It developed markets 
and exchanges for the buying and selling of 
securities and produce. 


The broad policy of encouraging individual 
initiative, a policy conceived by the framers of 
the constitution and continued unhampered until 
after 1890, proved a sort of chariot of progress 
for the nation. 


TA EE W ROE A Tee 


It is the drift from this policy that has cre- 
ated a growing sense of uneasiness in the busi- 
ness world in recent years. [here has been a 
tendency to regulate, to supervise, and to curtail © 
the normal activities of commerce. ‘This ten- 
dency has hung like a dark cloud on the business 
horizon. Instead of rejoicing at the convening 
of a new congress, business figuratively shudders, 
tightens its lines and impatiently awaits ad- 
journment to launch new projects. All of 
which is unhealthy from the standpoint of na- 
tional progress. 


Regulating grain exchanges has been a favor- 
ite pastime. Like railroads and a number of 
other industries, the exchanges long ago became 
a political football of the opportunist. Unrest 
has been capitalized and facts obscured. Ob- 
serving the grain exchanges and various public 
service groups squirm under the attacks of the 
crusaders, every other industry has wondered 
with some alarm just how soon its own thumb- 
screws would be given another twist. 


In the case of the grain exchanges it is a cu- 
rious fact that most of the legislative onslaughts, 


54 


meee Wee ART Pelt 


based as they were upon absurd contentions, 
have gone far wide of the mark. But time and 
again they have forced the exchanges to drain 
their resources in a fight for existence. And in- 
cidentally the costs drew a huge toll from the 
tax-payer. 


Millions have been spent by the govern- 
ment in investigating the grain exchange over 
a period of thirty odd years. Published reports 
of such inquiries equal one hundred full length 
novels. There are twenty-two thousand two 
hundred and eighty-one printed pages, most of 
the records being in small type on large sheets. 


The ten-year period following 1890, when 
the Butterworth bill finally failed, was a par- 
ticularly exciting one for the exchanges. For 
four years the Hatch bill to abolish grain futures 
kept the battle at fever heat. ‘This and like bills 
failed when farmers themselves withdrew support 
after finally realizing that to abolish the futures 
market would put them at the mercy of a small 
but powerful group who could dictate prices. 
Fortunes were spent in the fight both by the 
government and the exchanges,all to no purpose. 


55 


T BOE Wl BE AUT 


Then in 1898 congress had the Industrial 
Commission launch a _ three-year investigation 
directed mainly at farm distress. “There were 
nineteen volumes of report. General price re- 
cession during the twenty years beginning in the - 
seventies, the report discovered, had given rise 
to a belief that futures trading was the cause. 
On the contrary such trading was found to be 
beneficial to producer and consumer. ‘Con- 
clusive evidence shows that under speculation 
prices at the time producers dispose of the greater 
part of their products are greater in comparison 
to the rest of the year than they were before the 
advent of modern speculation.’ 


‘That investigation cost one million dollars. 
‘The tax-payer paid. 

Desultory attacks continued until 1910 when 
there was a federal investigation of the Chicago 
Board of Trade by the attorney general’s office. 
Charges against the exchange proved groundless 
and congress took no action. 


Low grain prices in 1913, resulting from 
heavy world production, prompted congress to 
authorize an investigation by the President. 
There were strong suspicions against specula- 


56 


PE Wy MO BV ANT. o POL iT 


tion. But after an exhaustive study by the de- 
partment of agriculture the President advised 
congress that the cause was a natural one. Again 
grain exchanges were exonerated. 


Wheat and flour prices from farmer to con- 
sumer was the subject of ponderous reports in 
1914, while half a thousand pages of futures 
trading testimony was heard by the rules com- 
mittee. [hat same year the secretary of agricul- 
ture completed an exhaustive survey of Kansas 
wheat prices and reported back to congress that 
“since the margins of profit taken by grain deal- 
ers in the large markets are very small, averag- 
ing about one cent a bushel, it appears far- 
mers of Kansas, as a general rule, are obtaining 
all their wheat is worth.” 


‘Those hungry for further official information 
on the subject of futures trading were given the 
voluminous report of the Commission of Indus- 
trial Relations two years later. A hundred thou- 
sand copies were printed. 


The hourglass of grain exchange history was 
turned upside down in 1917. Complaints had 
always been directed against low prices and spec- 
ulation had been suspected. But the war 


57 


TORE WHE Aol ape 


brought on high prices and incidentally pro- 
ducers were silent at last. But a loud outcry 
came from consumers and the President ap- 
pointed a committee to investigate, while con- 
gress ordered the federal trade commission and 
the department of agriculture to probe the ex- 
changes. ‘They must be at fault. 


From five to twenty men remained in the 
field constantly for the next four years, and re- 
port after report was compiled, the federal trade 
commission turning out five huge volumes up to 
1924. It was found, to the amazement of all, 
that the high level of prices was due to the war. 
Half a million dollars was the cost of the in- 
quiry. 

Reports on food investigations came from the 
trade commission two years later and still other 
reports on wheat and flour milling were submit- 
ted by that body after another two years. 


Drastic price deflation following the war en- 
gaged the federal trade commission in a new and 
sweeping investigation of exchanges. 


“The severe decline in prices of export grain 
in 1920, and the low prices in 1921,” reported 
the commission, ‘‘were chiefly due to the various 


58 


fee Whee BAYT) OPV T 


adverse factors in the general situation of the 
world market, such as large crops at home and 
abroad,general business depression, unfavorable 
exchange rates, and limited purchasing power 
and credit in foreign markets. 


“Evidence available does not establish manip- 
ulation of wheat prices by large operators in fu- 
tures, nor that the recent low average, or down- 
ward trend of wheat prices has been due to 
a speculative manipulation.” 


Along came the sixty-sixth congress, whose 
agricultural committee devoted weeks to the 
study of the grain exchanges, and with the aid 
of the congress which followed, added two thou- 
sand pages of testimony to the official records 
on the subject of grain futures trading. Mean- 
while the federal trade commission continued 
writing endless reports, and swung into a new 
investigation of Chicago terminal markets 
which was still progressing in 1925. 


Late in the summer of 1924 evidence of a pos- 
sible world wheat shortage was registered in the 
futures market and prices climbed steadily. The 
American farmer, with a bumper wheat crop, 


59 


TL ACE WORE Al ieee 


profited handsomely. Speculation had made 
the real situation obvious. And the farmers re- 
joiced. 

Just before the Presidential election oppo- 
nents of the administration charged that high 
wheat prices were a political conspiracy intended 
to secure the farmer vote. ‘This campaign ca- 
nard, like all other political tampering with the 
grain market, caused prices to slump off sharply. 
But after election they rebounded with dazzling 
resiliency, disproving the conspiracy charge. 


Winter wore on with the evidence of a world 
wheat famine becoming stronger and stronger, 
while the pits continued their roar and the quo- 
tation wires sang their old song of UP, UP, UP! 


Leading statisticians of all lands pointed to 
the gravity of the outlook. Foreign govern- 
ments sensed the impending crisis and at times 
caused near panic in American markets by their 
frenzied scramble for our wheat. The Wash- 
ington government, replying to an inquiry as to 
prevalent high prices, publicly announced that 
the world wheat shortage justified the values 
registered in the futures markets. 


60 


Mee Wik iE An ly Rib ad 


After the world had virtually agreed upon 
the dangers underlying the wheat situation, the 
public, always last to recognize an economic 
condition as reflected by the exchanges, leaped 
into the wheat market and bought with a mad- 
ness perhaps unequaled in history. “There was 
utter abandon. Speculation was in the air. The 
public was drunk with it. Money was plenti- 
ful. At the polls radicalism had been defeated. 
A President with sound business judgment and 
the confidence of the people had just been elected. 
The public press, in year-end reviews, saw 
naught but abounding prosperity for the next 
year and probably the next four years. Why 
not take a flyer? 


So, guided more by sensational headlines than 
by sound judgment, the public climbed into the 
market. “The market boiled over and before the 
orgy ended May wheat twice had been carried 
over the two dollar mark. ‘The speculating pub- 
lic was abusing the marketing machinery, throw- 
ing it out of gear. It was like dropping rocks 
into the thresher. But so long as prices soared 
everyone was happy. 


Then came a day of reckoning. ‘The over- 


61 


TORE WotR Al i 


inflated bubble burst. And as is usual the public 
got soap in its eyes and cried. Wheat prices 
in the tumble from dizzy heights went to a down- 
ward extreme before finally steadying to true 
values. "it 


There was actually a shortage which justified 
high prices, as was proved when May wheat fin- 
ished up that month around a dollar seventy-five. 
But because a frenzy of public speculation, 
brought on by prospects of a crisis, carried prices 
twenty-five or thirty cents too high, there was 
the usual thunderous outcry: Investigate the 
exchanges! 


What have the innumerable investigations, 
congressional debates and legal battles of the last 
thirty-five years established? ‘These simple facts: 
The exchanges with their futures trading and 
hedging facilities are a vital part of the whole 
complex business structure. [hey serve producer 
and consumer at lowest possible cost. Organized 
speculation makes a wider, more liquid market 
with greater price stability. Instead of depressing 
or controlling prices, the exchanges merely regis- 
ter true values as determined by world supply 
and demand. 


62 


Pee Wan bi Ae bh CPi D. 


In connection with crime mystery the French 
have a saying, cherchez la fermme—‘‘Seek the 
woman.” 


When the marketing machinery acts up, the 
investigators might well use as their guiding 
thought: “‘Seek the outside influence.’’ Invari- 
ably the trouble comes from the outside. 


Left undisturbed the grain futures market is 
indeed one of the marvels of present day 
commerce. 














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ae Tee ee 





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